Sunday, October 2, 2011

Gold and the Bear Market

Regular readers know that I am a fan of gold as an investment but not a true-believer in the hyper-inflation trade.

To me, the gold trade here is very simple:

We are in a bear market driven by concerns about sovereign default.

If (when) Greece defaults, counter-parties (banks, investors, etc) will need to raise dollars for a variety of reasons.

Assets such as stocks and gold, regardless of their “intrinsic value,” will be liquidated in exchange for dollars.

At this time, governments and central banks appear to be too preoccupied with their own debt and inflation to provide enough supply to meet the coming dollar demand.

Eventually, our debt problem will only be solved by default or inflation.

In the event of default or inflation, hard assets (like gold) will rise in value.

After the recent run-up, gold is now approaching its 200 day moving average. Over the past few years – this has been a solid entry point into gold.

However, over the past few years we have been in a bull market and not a bear market. This is no longer the case.

As inflation policy shifts from its current stance (highly undesirable) to its future stance (the least horrible option) – gold will shift from an asset that must be liquidated to an asset that must be bought.

So, in other words, I am skeptical that gold will remain above its 200 day moving average right now – but it remains a long-term asset that must be owned.